Forum

• # 74895
• Wed 05 Oct 2011 02:50 PM

Hi everyone. My client has in recent years bought large items of plant and machinery,they pay a monthly rental which is inclusive of VAT. At the end of the agreement both the finance company and my client raise invoices for the value of the plant and only at this point does my client become the legal owner. If these invoices are not raised my client pays and nominal annual rental of approx £150. The value of the rental payments cover the cost of the asset. My predecessor charged these rentals to the P&L therefore there is no fixed asset entry or corresponding liability nor have they been depreciated. When I have sought advice in the past, I have been advised that this is a Finance Lease and should be treated in the same manner as an asset bought under HP which is exactly how I would have expected it to be treated. Unfortunately my predecessor still states that this is a rental and not an asset and has expressed this to my client. His reasoning is that my client is not the legal owner and that they receive an annual rental schedule.
I would greatly appreciate it if anyone could advise me how to proceed.
Many thanks in advance.
Angie

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• # 74904
• Wed 05 Oct 2011 03:51 PM

Hi Angie

I am afraid I agree with your precedessor on this issue if what you have written is correct re the purchase or peppercorn rent a the end of the contract epriod.

It would only treat if as a Lease purchase if the goods become the proprty of the company upon making the final payment.

You have clearly stated the goods do not become the property of the company but remain the property of the leasing company unless a nominal sum is paid, however they can continue to rent the goods after the term of the original agreement for a peppercorn rental.

In this instance the best party to speak to in order to gain clarity on the issue is the lease company itself they will inform you if this an off balance sheet transaction or not.

you really need to look at the terms of the contract and will need to determine whi actually owns the goods. Remeber if they go on the balance sheet the company must have legal title to them even if they a used as security for the loan used to purchase them.

I hope this helps.

Kind regards
Stuart

• Forum Moderator, South East & Greater London Regional Chairman
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• # 74916
• Wed 05 Oct 2011 09:07 PM

Hi Stuart
Sorry, I am still confused. The finance company call this a Finance Rental and the guy I spoke to could not advise me on the accounting treatment. The more I look into the definition of a Finance lease and an operating lease the more I think that it may be finance leases.

The key IFRS criterion is:

1. If "substantially all the risks and rewards" of ownership are transferred to the lessee then it is a finance lease.
2. If it is not a finance lease then it is an operating lease.

The length of the leases are between 48 and 60 months and all cover the cost of the asset plus interest and include VAT. My client is responsible for the maintenance and insuring the plant, equipment and vehicles. At the end of the term both my client (the lessee) and the lessor raise invoices for the same value, no cash changes hands but this paper exercise transfers the ownership. Alternatively my client can agree to a secondary lease period at a significantly reduced annual payment.

I also found an article that states - SSAP 21, sets a simple test to determine whether a lease is a finance lease:

‘It should be presumed that such a transfer of risks and rewards occurs if at the inception of a lease the present value of the minimum lease payments, including any initial payment, amounts to substantially all (normally 90 per cent or more) of the fair value of the leased asset’ SSAP 21 paragraph 15

Thank you so much for your help. I really appreciate it.

Regards

Angie

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• # 74938
• Thu 06 Oct 2011 03:05 PM

I don't think its simply a case of legal ownership, the accounting concept of substance over form demonstrates this. To me it's sounding like it should be capitalised, but it's the IFRS that I would turn to for clarification, as you have done. I take it there isn't a company accountant for you to turn to for help?

• Ruth
  www.shoreaccounting.co.uk

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• # 74962
• Fri 07 Oct 2011 11:54 AM

Hi

Ruth this is one of those interesting topics where there is no real right or wrong answer so long as you can reasonbly justify your treatment.

I have always found the legal ownership argument the most expedient to use as you will have to take into account the treatment the lease company have made in their books.

Kind regards
Stuart

• Forum Moderator, South East & Greater London Regional Chairman
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• # 74987
• Fri 07 Oct 2011 10:06 PM

Stuart Wildmansaid:

“Hi

Ruth this is one of those interesting topics where there is no real right or wrong answer so long as you can reasonbly justify your treatment.

I have always found the legal ownership argument the most expedient to use as you will have to take into account the treatment the lease company have made in their books.

Kind regards
Stuart”

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